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ANGOLA: SEEKING A NEW PATH

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As economic growth slows and the country’s financial coffers move from surplus to deficit, Angola is rethinking its dependence on “black gold.”

For Angola, Africa’s second-largest oil producer, the fall in the price of crude oil has brought changes to its fundamentals, prompting the government, investors and analysts to review their positions on the economy. State revenue has fallen and could fall further if oil continues its downward movement, with dire implications.

“In the short to medium term, Angola may have to struggle with a weakening current-account deficit, lower fiscal revenue and likely cuts in government spending,” says Abiola Rasaq, head of research and strategy at Lagos-based financial institution Associated Discount House. During this period, foreign investors will be cautious because of the deterioration in the current account, which does not look like it will be improving any time soon, Rasaq adds.

Standard Bank holds a similar position on the country. “We anticipate that the current account will be placed firmly into deficit territory in 2015, given the sharp decline in oil export revenue,” Stephen Bailey-Smith, head of Africa research at Standard Bank, wrote in an African Markets Revealed report released in January. Angola’s current-account deficit will stand at 8.9% of GDP this year, declining to 3% in 2016, from a surplus equivalent to 1.3% of GDP in 2014, says Bailey-Smith.

We anticipate that the current account will be placed firmly into deficit territory in 2015, given the sharp decline in oil export revenue.

~ Stephen Bailey-Smith, Standard Bank

These projections are in sharp contrast to Angola’s experience of the past few years. Buoyed by high oil revenue, the country enjoyed a robust current-account surplus that rose steadily from 2010 to 2012, according to World Bank figures. The current-account surplus as a percentage of GDP was 12.6% and 12% in 2011 and 2012, respectively, which enabled Angola to accumulate foreign reserves. Economically speaking, Angola has been one of Africa’s leading performers. Up until 2013, GDP grew by an average rate of 10.7%, reaching an all-time high of 23.2% in 2007. After falling in the subsequent years, it rose again—to 6.3% in 2013, according to the World Bank. The multilateral attributed the rise to the country’s agricultural sector and to investments in the electricity sector. However the rate of economic growth decelerated to 4.4% in 2014, according to government estimates, with the decrease blamed on declining oil production.

Angola’s economy is expected to grow by just 3.5% this year, says Rasaq. The deceleration is likely to result from a reduction in government spending on infrastructure and social welfare to moderate the fiscal deficit, he explains. Inflation is also expected to remain in the upper single digits, based on an average of 9%, with lower government spending likely to put pressure on household disposable income and consumption, according to analysts.

TOUGH CHOICES AHEAD

Angola is Africa’s second-largest oil producer behind Nigeria, and like its West African counterpart, where the slump in oil prices forced a reconsideration of its dependence on oil, Angola now faces the challenge of having to restructure its economy to reduce its vulnerability to oil shocks. Revenue from oil and diamonds currently accounts for approximately 46% of GDP, and roughly 96% of foreign exchange earnings. But economic diversification is unlikely to happen overnight, as it requires painstaking and consistent investment in other sectors of the economy, including liberalization reforms that will enhance competition, human capital and infrastructure. Rasaq says Angola must accelerate its economic diversification toward secondary and tertiary production, which has the potential to create a higher number of jobs, unlike the relatively isolated oil sector, which has less integration with other sectors of the economy and concentrates wealth in the hands of a few elites.